The cruel truth about how much money two founders will likely get after selling their startup for $465 million reveals the catch-22 of raising too much money

Michael J. LeBrecht II /Sports Illustrated/Getty ImagesFanDuel co-founders Nigel Eccles and Tom Griffiths.
  • Paddy Power Betfair is acquiring fantasy sports company FanDuel.
  • FanDuel was valued at $US1 billion just three years ago. Now, the company is being sold for less than half that amount.
  • According to documents that detail the deal’s specifics, FanDuel’s original founders might not make any money from the sale.

Selling a company is usually cause for celebration, but for the founders of fantasy sports company FanDuel, the moment is likely to be bittersweet.

The nine-year-old company, which was once one of Britain’s most closely watched startups, was said to be valued at over $US1 billion just three years ago. Now, it’s valued at less than half that amount by the company that’s buying it, Dublin-based bookmaker Paddy Power Betfair.

According to documents first reported by Legal Sports Report that detail the specifics of the deal, FanDuel is now valued by its investors at around $US465 million.

FanDuel’s current valuation is about $US50 million more than the total amount of funding it’s received since 2009: A whopping $US416 million from investors including private equity firms Shamrock Capital and Kohlberg Kravis Roberts.

Now, those investors are cutting FanDuel’s founders a raw deal: As majority shareholders, they’re exercising their “drag along rights,” which allow them sell the company, even if the minority shareholders don’t want to.

In this case, the minority shareholders are FanDuel’s original founders, Nigel and Lesley Eccles, Tom Griffiths, Rob Jones, and Chris Stafford. None of the original co-founders still work at FanDuel, and it doesn’t look like their original efforts will be rewarded – according to the deal documents, they’re not going to make any money at all off of the company’s sale. Of course, it’s not clear what the financial terms were surrounding their departures from the company, and they could have negotiated a pay package

Because the amount FanDuel is being sold for is hardly more than the amount its investors originally gave, its co-founders are losing out. The deal stipulates that “no part” of the payable offer will go to the “company’s ordinary shares,” along with no options to purchase the company’s ordinary shares. In this case, those shares belong to the startup’s minority shareholders, which include its founders.

FanDuel’s founders’ loss is a classic case of the dangers of a sky-high valuation, in which the founders’ original shares are so diluted that their original involvement reaps little compensation when it comes time to sell the company.

The biggest winners of FanDuel’s sell? The company’s current executives, who are set up to make at least a few million dollars a piece.

NOW WATCH: Tech Insider videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.